These days there is a lot of news about the recovery in the banks property-mortgage business. They say, and it’s true, that the rise in mortgages is a fact and that the banks are seeing a rise in revenues thanks to mortgage lending. According to the National Statistics Institute, the number of mortgages signed in May rose 34.1% and 19.7% in the first five months of the year.
This news could lead a lot of people of to think that the Spanish banks are at the dawn of a new golden age of mortgages – or a possible bubble, depending on how you view it. However, that is not the case. In the first place because mortgages are growing, but from a negligible base. For the time being, the volume of mortgage loans is still low. In May, 25,000 mortgages were granted.
And don’t think mortgages are going to grow much for at least another six or seven years, and maybe even 10 years some people say. This is because there is a stock of 500,000 uninhabited houses and the population is declining. The most optimistic forecast points to 250,000 homes being built per year over the next decade, far off the 700,000 in the best of the ‘boom’ years.
But if the banks are still the protagonists in terms of granting mortgages to private individuals, another thing is new developments where their role is decreasing. Burned by what happened in the past, the banks are looking very closely, and selectively, at each new development proposal. Their financing conditions are now very tough. The banks are only funding developments in ‘prime’ locations, where the land is already paid for and there is a high percentage of sales already closed.
This has meant that in the last few years alternative financing formulas have emerged which property developers are using to push ahead with their projects. These include teaming up with investment funds, insurance companies and even with the MARF (The Alternative Fixed Income Market). This last option has been used by developers like Copasa.
But the worst thing of all is the limited role Spain’s banks have in the recovery of services sector-related property, namely in the big sales of offices, logistic parks or commercial centres. These transactions are being handled by investment funds, ‘family offices’ or Socimis.
Some of these operations, and the financing for the Socimis, have been funded by the banks, with the participation of Spanish lenders. But the majority have been carried out thanks to bond issues or syndicated loans mostly involving foreign banks.
For example, Merlin Properties is planning an 850 million euros bond issue to refinance a previous 1.7 billion euros bank loan. The main lenders were banks like Societe Generale, Credit Suisse, BNP Paribas, Crédit Agricole, ING, Intesa Sanpaolo, Mediobanca, Deutsche Bank, JP Morgan and Goldman Sachs. No Spanish bank. Colonial also completed a bond issue in May, for 1.250 billion euros, after Lar Espana had launched one for 140 million.
In the opinion of sector experts, all this is the result of the fact that the ECB has put limitations on the banks’ ability to grant property loans without a mortgage guarantee. Ismael Clemente, CEO of Merlin, said in an interview: “the banks don’t dare provide funding for property companies like ours because normally we ask for financing without a mortgage guarantee.”
Given that the Socimis are obliged by the ratings agencies to have a maximum of 25% of financing with a mortgage guarantee, the banks simply cannot be involved in the remaining 75% of the remaining transactions. The problem is that financing without mortgage guarantees consumes more capital, under current regulations, Clemente explained. “And the banks are short on capital.”
This situation doesn’t look like it will change any time soon. The banks are still reducing their mortgage-related bad loans and getting rid of the heap of property assets on their balance sheets. And if this weren’t enough, prodigious banking regulation has only served to drive the banks away from the property-mortgage-development business. In the first half of this year, Banco Sabadell set aside nearly 200 million euros to comply with the Bank of Spain’s tougher ruling on provisions for problematical property assets, effective from October.
The Economy Ministry’s latest reform also requires higher provisions, even for those loans classified as healthy: for example, lenders are obliged to provision up to 52% in the case of land and loans without a real guarantee, 29% for developments under construction and 14% for those already completed. And Brussels has just announced that it is looking at ways of containing the risk of the banks’ exposure to real estate assets. So even more measures.